US GDP growth slowed to 2.6% in Q4 2014 and PCE inflation was negative, at -0.5 percent

1. Economics for your Classroom from
Ed Dolan’s Econ Blog
As US Growth Slows in Q4,
Inflation Turns Negative
Posted January 30, 2015
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2. January 30, 2015 Ed Dolan’s Econ Blog
US GDP Growth Slows in Q4 2014
 The advance estimate from the Bureau
of Economic showed that US real GDP
grew at an annual rate of 2.6 percent in
Q4 2014
 That was barely half of the 5 percent
rate for Q3, but still a bit above the
average of 2.4 percent since the
recovery began in mid-2009

3. Phases of the Business Cycle
 According to standard terminology, the
recession phase of the business cycle
is the downward movement of GDP
from its previous peak
 It is common to refer to the first phase of
growth following the trough (low point)
of the recession as a recovery. During
that phase, idle equipment goes back
on line and workers return to their jobs.
 Official reports call the entire growth
phase of the cycle an expansion, but
many writers apply that term only after
GDP has reached its previous peak.
 Real GDP is now 8.8 percent above its
pre-recession peak
January 30, 2015 Ed Dolan’s Econ Blog

4. Sources of Growth by Sector
 Consumption grew a little faster than in Q2
and well above its average for the past five
years
 Investment growth was a little faster than in
Q3, but less was fixed investment and
more was inventory growth
 The government contribution to GDP was
negative in Q4, largely due to the reversal
of a burst of defense spending that had
boosted Q4 growth
 Export growth, which has been a strong
point of the recovery, slowed in Q4, while
imports grew strongly, turning net exports
from a positive to a negative
Contribution by sector to the
2.6% GDP growth in Q4 2014
Note: Imports are recorded in the national
accounts with a negative sign, so the -1.39
percentage points shown here represent an
increase in imports
January 30, 2015 Ed Dolan’s Econ Blog

5. Inflation Turns Negative
 The price index for personal
consumption expenditures fell at a -0.5
percent annual rate in Q4
 A market based measure of PCE
inflation, which excludes hard-to-
measure items like financial services,
fell at an annual rate of -1.1 percent
 The core PCE, which includes
financial services but excludes food
and energy, rose at a 0.7 percent rate,
more slowly than in the previous two
quarters
 All three versions of the PCE have
slowed over the past three years
January 30, 2015 Ed Dolan’s Econ Blog

6. Policy Implications
 The Fed plays close attention to data
from the national accounts in its
formulation of monetary policy
 Slowing growth and low PCE inflation
both make it less likely that the Fed
will hurry to tighten policy any time
soon
January 30, 2015 Ed Dolan’s Econ Blog

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